Question

Convert the interest rate J2=9% to J12 equivalent

Answer 1

J_m = i*m

Nominal interest rate = 9% per annum.

J₂=9%

J₁ = $J_{2} \times 2 = 9\% \times 2 = 18\%$

J₁₂= $J_{1}/12 = 18\% / 12 = 1.5\%$

J₂ is an interest rate of 9% per annum implying that it is compounded semi-annually. To convert it to J12 requires the conversion to J₁ to get the yearly interest rate compounded annually which in this case is equal to 18%. To get J₁₂, the J₁ interest is divided by 12 months to get 1.5% which means that and interest rate of 1.5 percent is charged on a monthly basis.